This week will be an important one for USDJPY and the US outlook in general. We think it makes sense to take stock of what is happening in various markets relative to the dollar at this junction. In this post, we look at Euro, Yen, Pound, and Gold relative to the US dollar, using our trading tools to get a comprehensive sense of what’s going on. As a refresher:

  • Trading Range: These ranges represent a trading bank within which a currency should trade based on multiple market factors. If we are long- prices above the upside range indicate the asset is expensive, and prices below the downside range suggest that they are cheap and vice versa if we are short.
  • Year-to-Date Returns: This is the price performance of a given currency over the course of the current calendar year, in percentage terms. We also compare the current price to the 52-week high and low for reference.
  • Price Momentum: This looks at cumulative rolling returns for a selected lookback period.  Positive momentum is good if we are long and bad if we are short. 
  • Implied Volatility Discount/Premium: This tells us what the market expects in terms of volatility relative to the history of volatility. If we are long a currency, we typically want market implied volatility to be higher than historical volatility and vice versa if we are short.

Let us look at our currency pairs through these lenses:

1. EURUSD: No Clear Signal 

After a weakening significantly this year, the Euro has made back some losses. From a trading perspective, momentum has now turned positive once again but remains mixed on a multi-duration basis.

Further, our volatility signal doesn’t indicate this is a good entry point for long positions. Additionally, our fundamental view is that EURUSD will remain weak this year.

2. USDJPY: Short-Term Momentum Dragging

USDJPY was a fantastic buy until a few weeks ago. Over the course of 2021, USDJPY has seen a significant rally as part of the generally strong dollar environment. This move has tempered in the recent past, making short-term momentum a detractor for further long positions:

Nonetheless, this is the second-best looking set-up from a long-dollar standpoint. Volatility premiums and upside/downside ratios are indeed supportive.

3. GBPUSD: Momentum, Volatility, and Risk/Reward Supportive

GBPUSD has been one of our favored dollar shorts this year, largely due to the fundamental mismatch in relative central bank balance sheet capacity. Indeed this has been good exposure, albeit having returned some gains over the last two months.

As we can see above, all our signals are pointing to a good entry point for GBPUSD. Implied vol premiums could be a little higher in our opinion, but the set-up is nonetheless favorable.

4. Gold: Short-Term Bounce, But Not Fundamentally Supported

The US and the world still remain in a global economic expansion. During this environment, gold is typically not a favorable asset to own. As such, gold still remains down on a year-to-date basis but has seen a consolidation since March. Indeed, Gold’s potential to rally in the second half of this year if the inflation environment remains elevated and economic growth rates moderate. However, we don’t think we’re there yet.

Hence, we continue to think gold is a favorable short position, but our trading signals aren’t supportive, as we can see above. We will have to wait for the next moves in gold.

 

Hence, the most currency pair with the most support from our trading tools analysis is GBPUSD, in line with our fundamental views.